1. GLENCOE / McGraw-Hill

2. Analyzing Business Transactions Using
T Accounts

3. Transactions That Affect Revenue, Expenses, and Withdrawals
Section Objectives
Set up T accounts for revenue and expenses.
Prepare a trial balance from T accounts.
Prepare an income statement, a statement of owner’s equity, and a balance sheet.
Develop a chart of accounts.

4. Revenue and Expense Accounts
Page 67

5. Some owner’s equity accounts are classified as:
Revenue
Expense
Separate accounts are used to record revenue and expense transactions.
Page 67

6. Recording Revenue from Services Sold for Cash
Page 67

7. Revenues increase owner’s equity.
Decrease
Side
Increase
Side
Decrease
Side
Increase
Side
Revenues increase owner’s equity.
Increases in owner’s equity appear on the right side of the T account.
Therefore, increases in revenue appear on the right side of revenue T accounts.
Page 67

8. Revenue
Decrease
Side
Increase
Side
The right side of the revenue account shows increases and the left side shows decreases.
Decreases in revenue accounts are rare but might occur because of corrections or transfers.
Page 67

9. Carter Consulting Services
During December the business earned $21,000 in revenue from clients who paid cash for bookkeeping, accounting, and consulting services.
Page 67

10. Carter Consulting Services
Which account is debited?
Which account is credited?
For what amount?
For what amount?
Page 68

11. Carter Consulting Services
Cash
Linda Carter, Capital
21,000
21,000
The preferred method is to keep revenue separate from the owner’s investment until the end of the investment period.
Page 68

12. Carter Consulting Services
Cash
21,000
Fees Income
21,000
Page 68

13. Reviewing the Effects of the Transactions
Cash
Fees Income
Bal. 49,000 (m) 21,000
(n) 21,000
$21,000 (m) is entered on the left (increase) side of the asset account Cash.
$21,000 (n) is entered on the right side of the Fees Income account.
Page 68

14. Objective 4
Set up T accounts for
revenue and expenses.
Page 68

15. Recording Revenue from Services Sold on Credit
Page 68

16. Accounts Receivable
The accounts receivable account is used for charge customers.
Accounts receivable is classified as an asset.
Page 68

17. Business Transaction
In December Carter Consulting Services earned $7,000 from various charge accounts clients.
Analysis:
(o) The asset account, Accounts Receivable, is increased by $7,000.
(p) The revenue account, Fees Income, is increased by $7,000.
Page 68

18. Left-Right Rules REVENUE ASSETS Page 68 Record increases

19. T-Account Presentation
Which T account has an entry
on the left?
Which T account has an entry
on the right?
For what amount?
For what amount?
Page 68

20. T-Account Presentation
Accounts Receivable
Fees Income
(o) 7,000
(p) 7,000
Page 68

21. Reviewing the Effects of the Transactions
Accounts Receivable
Fees Income
(o) 7,000
(n) 21,000
(p) 7,000
REMEMBER
REVENUE ACCOUNTS
- Record decreases
+ Record increases
Page 68

22. Recording Collections from Accounts Receivable
Page 68

23. Business Transaction
Charge account clients paid $3,000, reducing the amount owed to Carter Consulting Services.
Analysis:
(q) The asset account, Cash, is increased by $3,000.
The asset account, Accounts Receivable, is decreased by $3,000.
Page 68

24. Left-Right Rules ASSETS ASSETS Page 69 Record increases
Record decreases
Page 69

25. T-Account Presentation
Which T account has an entry
on the left?
Which T account has an entry
on the right?
For what amount?
For what amount?
Page 69

26. T-Account Presentation
Cash
Accounts Receivable
(q) 3,000
(r) 3,000
Page 69

27. Reviewing the Effects of the Transactions
Cash
Accounts Receivable
Bal. 49, (m) ,000 (q) ,000
(o) 7,000
(r) 3,000
Remember:
The revenue is not recorded when cash is collected from charge account clients.
The revenue was recorded when the sales on credit were recorded.
Page 69

28. Recording an Expense for Salaries
Page 69

29. Expenses decrease owner’s equity.
Decrease Side
Increase Side
Expense
Revenue
Increase Side
Decrease Side
Decrease Side
Increase Side
Expenses decrease owner’s equity.
Decreases in owner’s equity appear on the left side of the T accounts.
Page 69

30. Business Transaction
In December Carter Consulting Services paid $5,000 in salaries.
Analysis:
(s) The asset account, Cash, is decreased by $5,000.
(t) The expense account, Salaries Expense, is increased by $5,000.
Page 69

31. Left-Right Rules EXPENSE ASSETS Page 69 Record increases
Record decreases
Page 69

32. T-Account Presentation
Which T account has an entry
on the left?
Which T account has an entry
on the right?
For what amount?
For what amount?
Page 70

33. T-Account Presentation
Salaries Expense
Cash
(t) 5,000
(s) 5,000
Page 70

34. Reviewing the Effects of the Transactions
Salaries Expense
Cash
(t) 5,000
Bal ,000
(m) 21,000
(q) ,000
(s) 5,000
REMEMBER
EXPENSE ACCOUNTS
+ Record increases
- Record decreases
Page 70

35. Recording an Expense for Utilities
Page 70

36. Business Transaction
Carter Consulting Services issued a check for $600 to pay the utilities bill.
Analysis:
(u) The asset account, Cash, is decreased by $600.
(v) The expense account, Utilities Expense, is increased by $600.
Page 70

37. Left-Right Rules EXPENSE ASSETS Page 70 Record increases
Record decreases
Page 70

38. T-Account Presentation
Which T account has an entry
on the left?
Which T account has an entry
on the right?
For what amount?
For what amount?
Page 71

39. T-Account Presentation
Utilities Expense
Cash
(v) 600
(u) 600
Page 71

40. Reviewing the Effects of the Transactions
Utilities Expense
Cash
(v) 600
Bal. 49,000
(m) 21,000
(q) ,000
(s) ,000
(u)
Page 71

41. The Drawing Account
Page 71

42. What is a drawing account?
QUESTION:
What is a drawing account?
A drawing account is a special type of owner’s equity account set up to record the owner’s withdrawal of cash from the business.
ANSWER:
Page 71

43. Drawing decreases owner’s equity.
Decrease Side
Increase Side
Expense
Revenue
Increase Side
Decrease Side
Decrease Side
Increase Side
Drawing
Increase Side
Decrease Side
Drawing decreases owner’s equity.
Decreases in owner’s equity appear on the left side of the T accounts.
Page 71

44. Business Transaction
Linda Carter wrote a check to withdraw $3,000 cash for personal use.
Analysis:
(w) The asset account, Cash, is decreased by $3,000.
(x) The owner’s equity account, Linda Carter, Drawing, is increased by $3,000.
Page 71

45. Left-Right Rules DRAWING ACCOUNT ASSETS Page 71 Record increases
Record decreases
Page 71

46. T-Account Presentation
Which T account has an entry
on the left?
Which T account has an entry
on the right?
For what amount?
For what amount?
Page 71

47. T-Account Presentation
Linda Carter, Drawing
Cash
(x) 3,000
(w) 3,000
Page 71

48. Reviewing the Effects of the Transactions
Linda Carter, Drawing
Cash
(x) 3,000
Bal. 49,000
(m) 21,000
(q) ,000
(s) 5,000
600
(w) 3,000
Page 72

49. The Rules of Debit and Credit
Page 72

50. A debit is an entry on the left side of an account.
QUESTION:
What is a debit?
A debit is an entry on the left side of an account.
ANSWER:
Page 72

51. A credit is an entry on the right side of an account.
QUESTION:
What is a credit?
A credit is an entry on the right side of an account.
ANSWER:
Page 72

52. What is a double-entry system?
QUESTION:
What is a double-entry system?
A double-entry system is an accounting system that involves recording the effects of each transaction as debits and credits.
ANSWER:
Page 72

53. Any Account DEBIT SIDE CREDIT SIDE
Left Side
Right Side
Accountants refer to the left side of an account as the debit side instead of saying the left side.
The right side of the account is called the credit side.
Page 72

54. Double-entry Accounting
Every transaction must have at least two parts:
Debit
Credit
Page 72

55. Rules for Debits and Credits
Asset Accounts
Liability Accounts
Owner’s Capital Account
Debit Credit
Increase Decrease Side Side
(Normal
Bal.)
Debit Credit
Decrease Increase Side Side
( Normal Bal.)
Debit Credit
Decrease Increase Side
Side ( Normal Bal.)
Owner’s Drawing Account
Revenue Accounts
Expense Accounts
Debit Credit
Increase Decrease Side Side
(Normal
Bal.)
Debit Credit
Decrease Increase
Side Side
(Normal
Bal.)
Debit Credit
Increase Decrease
Side Side
(Normal
Bal.)
Page 72

56. The Trial Balance
Page 73

57. Prepare a trial balance from T accounts.
Objective 5
Prepare a trial balance from
T accounts.
Page 73

58. QUESTION:
What is a trial balance?
A trial balance is a statement to test the accuracy of total debits and credits after transactions have been recorded.
ANSWER:
Page 73

59. Complete the trial balance in six steps.
Enter the trial balance heading showing the company name, report title, and closing date for the accounting period.
List the account names in the same order as they appear on the financial statements.
Assets
Liabilities
Owner’s Equity
Revenue
Expenses
Page 73

60. Complete the trial balance in six steps.
3. Enter the ending balance of each account in the appropriate Debit or Credit column.
4. Total the Debit column.
5. Total the Credit column.
6. Compare the total debits with the total credits.
Page 73

61. Carter Consulting Services
DEBIT
CREDIT
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Linda Carter, Capital
Accounts Payable
Linda Carter, Drawing
Fees Income
Salaries Expense
Utilities Expense
Totals
120,000
64,400
12,000
80,000
3,000
28,000
5,000
600
35,000
6,000
4,000
2,000
Carter Consulting Services
Trial Balance
December 31, 2004
Page 74

62. Understanding Trial Balance Errors
Page 74

63. Some common errors in a trial balance are:
Adding trial balance columns incorrectly
Recording only half a transaction – for example, recording a debit but not recording a credit, or vice versa
Recording both halves of a transaction as debits or credits rather than recording one debit and one credit
Recording an amount incorrectly from a transaction
Recording a debit for one amount and a credit for a different amount
Making an error when calculating the account balances
Page 74

64. Finding Trial Balance Errors
Page 74

65. Carter Consulting Services
DEBIT
CREDIT
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Linda Carter, Capital
Accounts Payable
Linda Carter, Drawing
Fees Income
Salaries Expense
Utilities Expense
Totals
122,000
120,000
64,400
12,000
80,000
3,000
28,000
5,000
600
35,000
6,000
4,000
2,000
Carter Consulting Services
Trial Balance
December 31, 2004
1. Check the arithmetic.
Page 74

66. Carter Consulting Services
DEBIT
CREDIT
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Linda Carter, Capital
Accounts Payable
Linda Carter, Drawing
Fees Income
Salaries Expense
Utilities Expense
Totals
120,000
64,400
12,000
80,000
3,000
28,000
5,000
600
35,000
6,000
4,000
2,000
Carter Consulting Services
Trial Balance
December 31, 2004
1. Check the arithmetic.
Page 74

67. Carter Consulting Services
Check that the correct account balances were transferred to the correct trial balance columns.
DEBIT
CREDIT
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Linda Carter, Capital
Accounts Payable
Linda Carter, Drawing
Fees Income
Salaries Expense
Utilities Expense
Totals
116,000
120,000
60,400
12,000
80,000
3,000
28,000
5,000
600
35,000
6,000
4,000
2,000
Carter Consulting Services
Trial Balance
December 31, 2004
64,400
ACCOUNT ____________________________ ACCOUNT NO. ________
DATE
DESCRIPTION
POST
REF.
DEBIT
CREDIT
BALANCE
Nov. 30
Dec. 31
2004
Bal. forward J2
21,000
3,000
5,000
600
49,000
70,000
73,000
68,000
67,400
Cash
101
Page 74

68. Carter Consulting Services
Check that the correct account balances were transferred to the correct trial balance columns.
DEBIT
CREDIT
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Linda Carter, Capital
Accounts Payable
Linda Carter, Drawing
Fees Income
Salaries Expense
Utilities Expense
Totals
120,000
64,400
12,000
80,000
3,000
28,000
5,000
600
35,000
6,000
4,000
2,000
Carter Consulting Services
Trial Balance
December 31, 2004
64,400
ACCOUNT ____________________________ ACCOUNT NO. ________
DATE
DESCRIPTION
POST
REF.
DEBIT
CREDIT
BALANCE
Nov. 30
Dec. 31
2004
Bal. forward J2
21,000
3,000
5,000
600
49,000
70,000
73,000
68,000
67,400
Cash
101
Page 74

69. Carter Consulting Services
Check the arithmetic used to compute the account balances.
Carter Consulting Services
Trial Balance
December 31, 2004
64,400
ACCOUNT ____________________________ ACCOUNT NO. ________
DATE
DESCRIPTION
POST
REF.
DEBIT
CREDIT
BALANCE
Nov. 30
Dec. 31
2004
Bal. forward J2
21,000
3,000
5,000
600
49,000
70,000
73,000
68,000
67,400
46,400
Cash
101
Due to a math error, the wrong balance was transferred from the general ledger account.
ACCOUNT NAME
DEBIT
CREDIT
Cash
46,400
Accounts Receivable
4,000
Supplies
2,000
Prepaid Rent
6,000
Equipment
35,000
Accounts Payable
12,000
Linda Carter, Capital
80,000
Linda Carter, Drawing
3,000
Fees Income
28,000
Salaries Expense
5,000
Utilities Expense
600
102,000
120,000
Page 74
Totals

70. Carter Consulting Services
Check the arithmetic used to compute the account balances.
DEBIT
CREDIT
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Linda Carter, Capital
Accounts Payable
Linda Carter, Drawing
Fees Income
Salaries Expense
Utilities Expense
Totals
120,000
64,400
12,000
80,000
3,000
28,000
5,000
600
35,000
6,000
4,000
2,000
Carter Consulting Services
Trial Balance
December 31, 2004
64,400
ACCOUNT ____________________________ ACCOUNT NO. ________
DATE
DESCRIPTION
POST
REF.
DEBIT
CREDIT
BALANCE
Nov. 30
Dec. 31
2004
Bal. forward J2
21,000
3,000
5,000
600
49,000
70,000
73,000
68,000
67,400
Cash
101
Page 74

71. Carter Consulting Services
Cash
49,000
21,000
3,000
Utilities Expense
600
5,000
Carter Consulting Services
Trial Balance
December 31, 2004
64,400
ACCOUNT ____________________________ ACCOUNT NO. ________
DATE
DESCRIPTION
POST
REF.
DEBIT
CREDIT
BALANCE
Nov. 30
Dec. 31
2004
Bal. forward J2
21,000
3,000
5,000
600
2,000
49,000
70,000
73,000
68,000
67,400
63,400
Cash
101
ACCOUNT NAME
DEBIT
CREDIT
Cash
63,400
Accounts Receivable
4,000
Supplies
2,000
Prepaid Rent
6,000
Equipment
35,000
Check that each transaction was recorded correctly in the accounts by tracing the amounts to the analysis of the transaction.
Accounts Payable
12,000
Linda Carter, Capital
80,000
Linda Carter, Drawing
3,000
Fees Income
28,000
Salaries Expense
5,000
Utilities Expense
600
119,000
120,000
Page 74
Totals

72. Carter Consulting Services
Cash
49,000
21,000
Utilities Expense
600
5,000
Carter Consulting Services
Trial Balance
December 31, 2004
3,000
64,400
ACCOUNT ____________________________ ACCOUNT NO. ________
DATE
DESCRIPTION
POST
REF.
DEBIT
CREDIT
BALANCE
Nov. 30
Dec. 31
2004
Bal. forward J2
21,000
3,000
5,000
600
49,000
70,000
73,000
68,000
67,400
Cash
101
ACCOUNT NAME
DEBIT
CREDIT
Cash
64,400
Accounts Receivable
4,000
Supplies
2,000
Prepaid Rent
6,000
Equipment
35,000
Check that each transaction was recorded correctly in the accounts by tracing the amounts to the analysis of the transaction.
Accounts Payable
12,000
Linda Carter, Capital
80,000
Linda Carter, Drawing
3,000
Fees Income
28,000
Salaries Expense
5,000
3, ,400
Utilities Expense
600
120, 000
120,000
Page 74
Totals

73. Financial Statements
Page 75

74. Prepare an income statement, a statement of owner’s equity,
Objective 6
Prepare an income statement,
a statement of owner’s equity,
and a balance sheet.
Page 75

75. After the trial balance is prepared, the financial statements are prepared.
Net income from the income statement is used on the statement of owner’s equity.
The ending balance of the Linda Carter, Capital account, computed on the statement of owner’s equity, is used on the balance sheet.
Page 75

76. Page 75 CARTER CONSULTING SERVICES Income Statement
Month Ended December 31, 2004
Revenue
Fees Income ,000.00
Expenses
Salaries Expense 5,000.00
Utilities Expense
Total Expenses ,600.00
Net Income ,400.00
CARTER CONSULTING SERVICES
Statement Of Owner’s Equity
Month Ended December 31, 2004
Linda Carter, Capital, Dec. 1, ,000.00
Net Income for December ,400.00
Less Withdrawals for December ,000.00
Increase in Capital ,400.00
Linda Carter, Capital, Dec. 31, ,400.00
CARTER CONSULTING SERVICES
Balance Sheet
December 31, 2004
ASSETS LIABILITIES
Cash , Accounts Payable ,000.00
Accounts Receivable ,000.00
Supplies ,000.00
Prepaid Rent , OWNER’S EQUITY
Equipment , Linda Carter, Capital ,400.00
Total Assets , Total Liabilities and Owner’s Equity ,400.00
Page 75

77. Chart of Accounts
Page 75

78. Develop a chart of accounts.
Objective 7
Develop a chart of accounts.
Page 75

79. What is a chart of accounts?
QUESTION:
What is a chart of accounts?
A chart of accounts is a list of the accounts used by a business to record its financial transactions.
ANSWER:
Page 75

80. Chart of Accounts Each account has a number and a name.
The balance sheet accounts are listed first, followed by the income statement accounts.
The account number is assigned based on the type of account.
Page 75

81. CARTER CONSULTING SERVICES
Balance Sheet Accounts
ASSETS
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
LIABILITIES
Accounts Payable
OWNER’S EQUITY
Linda Carter, Capital
Statement of Owner’s Equity Account
Linda Carter, Drawing
Income Statement Accounts
REVENUE
Fees Income
EXPENSES
Salaries Expense
Utilities Expense
CARTER CONSULTING SERVICES
Chart of Accounts Account Number Account Name
Page 77

82. Permanent and Temporary Accounts
Page 76

83. What is a permanent account?
QUESTION:
What is a permanent account?
A permanent account is an account that is kept open from one accounting period to the next.
ANSWER:
Page 76

84. Permanent accounts are:
Assets
Liabilities
Owner’s capital
The permanent accounts appear on the balance sheet at the end of an accounting period.
The balances of these accounts are then carried forward to start the new accounting period.
Page 76

85. What is a temporary account?
QUESTION:
What is a temporary account?
A temporary account is an account whose balance is transferred to another account at the end of an accounting period.
ANSWER:
Page 77

86. Temporary accounts are:
Drawing
Revenue
Expenses
Page 76

87. Complete the following sentences:R E V I W
Complete the following sentences:
A special type of owner’s equity account set up to record the owner’s withdrawal of cash from the business is called a(n) _______________.
drawing account
An entry in the left side of an account is a(n) _____.
debit
An entry on the right side of an account is a(n) ______.
credit

88. Complete the following sentences:R E V I W
Complete the following sentences:
An accounting system that involves recording the effects of each transaction as debits and credits is called a(n) __________________.
double-entry system
A statement to test the accuracy of total debits and credits after transactions have been recorded is called a(n) ___________.
trial balance
A list of accounts used by a business to record its financial transactions is called a(n) _______________.
chart of accounts

89. College Accounting, Tenth Edition
Thank You
for using
College Accounting, Tenth Edition
Price • Haddock • Brock